H&M successfully widened its profit margins and improved operating cash flow through aggressive inventory control and cost reductions, even as weak European demand and supply chain constraints weighed on overall sales. Flat top-line revenues and missed operating profit forecasts continue to challenge the global fast-fashion retailer’s turnaround.
Financial Snapshot
- Adjusted Operating Profit: Rose 11% year-over-year to 6.59 billion SEK (excluding restructuring costs).
- Gross Margin: Widened to 56.6% from 55.4% the previous year.
- Net Sales: Totaled 54.83 billion SEK, which represented a 3.3% decline in reported terms or a 1% drop in local currencies.Inventory Reduction: Dropped by 10% year-over-year, significantly reducing the reliance on discounting.
Key Factors Behind Margin Growth
- Tighter Stock Control: CEO Daniel Ervér prioritized margin over scale, keeping less inventory in the system. Less excess stock resulted in fewer markdowns and maximized full-price sales, which drove the surge in gross margins.
- Organizational Restructuring: H&M took a one-off restructuring charge of 679 million SEK associated with corporate job cuts. This effort flattened the organization and streamlined operations across its 81 countries.
- Store Network Optimization: The company accelerated its store footprint revamp, shuttering 17 flagship stores in the second quarter and bringing the half-year total to 61 closures. H&M now plans to close 170 locations and open 90 new stores by the end of the year, focusing on expanding into growth markets like Brazil.
Headwinds Impacting Sales
- Weak Western European Demand: Western Europe remains H&M’s largest region by sales, but revenues dropped 3% in local currencies. Management pointed to soft consumer confidence and cautious household spending in regions like the UK.
- Product Availability Shortages: While tight inventory control was excellent for profit margins, it created supply gaps. The company was unable to fully meet consumer demand during May and June, resulting in missed sales targets.
- Intensified Competition: H&M continues to fight for market share against rapidly growing, ultra-cheap online retailers (such as Shein) and Zara, which dominates the higher end of fast fashion.
Tracking this margin resilience and ongoing structural changes is essential for monitoring whether H&M can successfully pair its operational discipline with a return to top-line growth.
